Friday, January 27, 2012

A turning point in sovereign debt handling?

This recent posting in the blog called The Slog concluded with the following statement:

“None of this will save Greece – or indeed the Eurozone. But my water tells me this could be a turning point in relations between sovereign states and their creditors”.

My response to this is below.


If this becomes such a turning point, then it will not be a turn towards a new era of relations between sovereign states and their creditors but, instead, it will be a return to the way things have always been handled between sovereign states and their creditors. It is only thanks to the incompetence of EU-elites that what we have seen evolve in the last 2 years has turned into a perversion of banking. The only thing one can say in defense of those EU-elites is that they had no experience with external payment problems of sovereign states before, but they could have asked those who had. As the Senior Economist of Citibank said recently: “The Europeans didn’t know that outside of Europe reschedulings have come a dime a dozen in recent decades”.

The first thing which must happen when sovereign states see external payment problems around the corner is that their creditors are called upon to form a Steering Committee with which the state can negotiate. As of this date, there is no official Steering Committee representing all creditors of Greece. There is this entity called IIF which feels self-appointed to lead negotiations but they don’t seem to have a mandate from anyone. Certainly not from Deutsche Bank because Josef Ackermann, Deutsche’s CEO and the IIF’s Chairman, was called back from the negotiations by his board citing that he had no mandate from Deutsche to strike deals. Without a Steering Committee as a first step, there is no way that one can effectively keep private creditors “on the hook”.

Whenever the Steering Committee tries to pass the buck to governments, the latter return the buck and insist that negotiating results must first be achieved between borrower & creditors before the governments come in. Governments come in at the end of this process and not at its beginning (in the case of Greece, governments jumped the gun without any need to do so!). Governments will, of course, “monitor” the process behind the scenes (and exert pressure here and there when necessary).

Borrower & lenders will always reach some form of negotiating results because they know that the alternative would be disaster for both. The only question is how much of a hole they keep open to be filled by governments. In the case of Greece, the banks got away by saying from the start that the governments would have to fill 100% of the hole and that was never really contested by governments. In actual fact, governments rarely get involved with existing debt because that should be rescheduled with existing creditors. Governments typically take care of the Fresh Money.

Then there is the role of the borrower. The initiative must always be taken by the debtor country and never given out of its hand. The debtor country must make a restructuring proposal to its creditors. The politicians of the debtor country must show that what they propose is “their proposal” and not something imposed on them by foreigners. In the case of Greece, Mr. Papandreou turned, from the start, his problem into a problem of the EU and the EU was silly enough to accept that ball right away. From that moment on, Mr. Papandreou had no choice but to be perceived as the recipient of orders taken by others. No chance that the resulting deal will have domestic support.

I could go on and on. Instead, I enclose a couple of links showing how incompetent EU-elites turned what would/should have been the most natural problem in the world into the risk of a financial Armaggeddon!

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